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Today’s AFME, European Market Liquidity Conference was very well attended, with a great program – each item could have done with its own full day session. Below are quick notes I jotted down during some of the sessions, although clearly I don’t do justice to the quality of debate at the conference.

There was a good mix of attendees, participants and panellists, across the spectrum covering buy & sell side firms, central bankers, regulators, clearers, policy makers and vendors. Views expressed were personal ones (ie no policy statements from the ECB – although Francesco Papadia wasn’t shy in promoting his book!).

So, what themes emerged:

Regulation & Impact on Liquidity:

Prioritisation of reforms: Concern was expressed that participants don’t have enough visibility on the proposed regulatory requirements, as they are not finalised them yet, or the time or resources required to fully re-engineer and implement much of the regulatory changes that they know are coming.

Simon Maisey, Global Head of Rates eCommerce, JP Morgan suggested (a personal view) that perhaps prioritisation along the lines of:

1. Move to central clearing, with CCP connectivity and margining and collateral transformation.
2. Implement capital rule changes
3. Pre and Post Trade transparency, with trade reporting
4. Then move to electronic trading of cleared products on SEFs

Liquidity is ‘Fragile’: There was concern that liquidity is ‘fragile’ and that much of the analysis on the possible regulatory impact on liquidity was based on equity market analysis, which is not really applicable to say the fixed income markets. There was concern expressed that imposing greater pre-trade transparency, whilst also moving from bi-lateral to an agency cleared model, could adversely affect liquidity provision, and that a more gradual migration is needed.

Regulators expressed need for global regulatory co-ordination and convergence: The regulators on the panels, expressed that Europe should not just follow the US regulatory implementations. But that Europe has an important role in working with the US to shape and global regulatory reforms, and they felt it was critically important that their moves were coordinated, and that implementation timelines converged more, and that the world wasn’t just following US Dodd Frank. Although, several ‘market practitioners’ did voice concern that US and Europe were actually diverging in their regulatory approach.

Costs will rise everywhere, and scale is the name of the game

Technology and infrastructure spend: The huge costs of investment required, will force peripheral players to exit certain markets (another example of the unintended consequence of the regulation). Scale will become the name of the game, and the big players, typically those banks that have already built Prime Services businesses, will leverage that existing infrastructure, and push as much transactional flow as possible through the cleared route.

Cost of Credit: Banks will need to work through the fully loaded cost implications which will be passed on to buyside firms of credit availability in moving from bi-lateral trading to centrally a cleared model. Where buyside firms will be subject to initial and variation margining, and need to post collateral. Bank’s will need to re-calibrate the ‘true’ cost of credit availability for their clients, which is something that the Prime Services divisions already do well.

Interesting article here challenges to buyside of margin management.

Execution in the new cleared world model – where will buyside execute

Much debate that whilst regulation is certainly a catalyst, it was innovation & the need for “flexibility” that is driving much of the developments in electronic trading. Lee Sanders, Global Head of FX Execution at AXA Investments, explained that faced with rising connectivity costs, they are implementing an EMS platforms, plugging in single bank and venue feeds, implementing algo’s and using equity style Transaction Cost Analysis – which is used in their bank reviews!

What about Single Bank Platforms? It was felt that SDPs would not go away, far from it. They would continue to offer highly ‘tailored’ solutions, and as mandatory SEF execution was introduced, provide access to ‘SEF liquidity’ via SDP algo’s (smart order routing). In other words, SDPs would adapt to the ‘new market’ structures, and continue delivering liquidity and workflow solutions to clients.

Last years AFME conference coverage is here

Filed under: CCP, CFTC, Dodd Frank, MiFid, OTF, Paul Blank, Regulation, Web trading technology | Tagged: AFME |